Record Loans in Hong Kong as Shimao Hunts Dollars: China Credit

Hong Kong loans are on track for a record year as Chinese companies, facing financing restrictions at home, take advantage of lower funding costs in a market led by HSBC Holdings Plc.

Chongqing Iron & Steel Co. (601005) paid 5.76 percent interest for a three-year yuan loan and about 3.29 percent for U.S. dollars when it borrowed in China last month. In Hong Kong, Shimao Property Holdings Ltd. (813) paid about 2.99 percent for a $460 million, three-year loan in May, and China Vanke Co. got five- year money for 3.1 percent in April. Lending in the city rose to $26.1 billion this year, topping a previous record of $23.5 billion set in the same period in 2006, according to data compiled by Bloomberg.

“Whenever these companies can they’ll try and borrow in Hong Kong rather than tap the market in China,” David Yim, an executive director of debt capital markets at Royal Bank of Scotland Group Plc, said in a phone interview from Hong Kong. “Companies prefer to borrow in weaker currencies. It’s almost one-way traffic now.”

HSBC, Europe’s largest bank, remained the top arranger of Hong Kong loans after China’s government imposed a 7.5 trillion yuan ($1.1 trillion) annual limit on new lending by local banks this year in an effort to prevent asset bubbles. China faces increasing pressure to let its currency appreciate as global leaders say the yuan gives the world’s fastest-growing major economy a trade advantage. A stronger yuan would make it cheaper for Chinese companies to service dollar debt.

Yuan Appreciation

The yuan appreciated 2.6 percent since its peg to the dollar was scrapped on June 19, according to the China Foreign Exchange Trade System. Among the so-called BRIC group of emerging economies, Brazil’s real rose the most over the same period at 7.2 percent, India’s rupee strengthened 3.7 percent and the Russian ruble appreciated 2.7 percent.

The yuan rose 0.2 percent to 6.6508 against the U.S. currency yesterday. The Dollar Index, which gauges the currency against six of its peers, slid to the lowest level of the year as increases in jobless claims and the trade deficit underscored the challenges facing the Federal Reserve to boost economic growth.

Of the 74 loans arranged for Chinese companies in Hong Kong dollars or greenbacks this year, almost three-quarters are denominated in the U.S. currency, data compiled by Bloomberg show. China Vanke (000002), the nation’s biggest listed property developer, and a Hong Kong unit of Beijing-based Citic Group, were among borrowers that helped push loan volumes to almost five times the $6.1 billion recorded in the same period last year.

‘Price Differential’

“There’s a definite price differential that’s opened up between China and Hong Kong,” said Phil Lipton, HSBC’s Hong Kong-based head of syndicated finance for Asia-Pacific debt capital markets. “Chinese companies are tapping offshore liquidity because U.S. dollar borrowings on the mainland are more expensive.”

HSBC, based in London, arranged almost as many Hong Kong loans as Bank of China Ltd. and Standard Chartered Plc combined, with an 11.8 percent market share, according to data compiled by Bloomberg.

The cost of borrowing yuan-denominated loans in China is fixed by regulators, with companies typically paying between 90 percent and 100 percent of a rate set by the People’s Bank of China. The benchmark rate for one- to three-year money is set at 5.4 percent, with loans of more than five years set at 5.94 percent, according to the central bank.

Libor

The three-month London interbank offered rate for dollars, the most widely-used measure of lending costs, was last at 0.2891 percent, according to the British Bankers’ Association. The three-month Hong Kong interbank offered rate is 0.32929 percent.

“Borrowing in China is pretty tight this year as banks have to comply with loan-to-deposit ratios,” Yim said. ‘If companies borrow in yuan, lending rates are regulated and there’s a minimum even if you’re a top credit.’’

Hong Kong operates as a special administrative region in China with its own legal and financial systems.

Lower Risks

China’s world-beating economic growth and improving creditworthiness are helping to spur yuan appreciation. Twelve- month non-deliverable forwards strengthened 3.5 percent to 6.4310 per dollar in the past month in Hong Kong, reflecting bets for a gain of 3.4 percent from the onshore spot rate. The contracts, settled in dollars, enable investors to buy and sell assets at a set price on a specified date.

The risk of insuring against a default by the Chinese government is falling. Five-year credit-default swaps on the nation’s bonds fell 31 percent in the past month, the biggest drop among the Group of 20 nations, and last traded at 52 basis points, according to data compiled by CMA and Bloomberg.

The yield on the 3.28 percent China government bond due in August 2020 rose 19 basis points to 3.39 percent since trading started on Aug. 12, Interbank Funding Center data show.

Currency controls on the yuan restrict remittances of money borrowed overseas, and a Chinese company planning to borrow dollars within the domestic financial system must demonstrate a specific need for that currency, according to Eric Chan, London- based Standard Chartered’s North Asia head of loan syndication.

“Those companies are using Hong Kong as a platform to raise funds in dollars,” Chan said in a phone interview from Hong Kong. “With companies needing funds to refinance and for expansion, the Hong Kong loans market will continue to be active in 2011.”

To contact the reporter on this story: Katrina Nicholas in Singapore at knicholas2@bloomberg.net

To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net

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